Tax Policy: Tax Treatment of Life Insurance and Annuity Accrued Interest
GGD-90-31
Published: Jan 29, 1990. Publicly Released: Feb 06, 1990.
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Highlights
Pursuant to a legislative requirement, GAO assessed the Technical and Miscellaneous Revenue Act of 1988, focusing on the: (1) effectiveness of the revised tax treatment of life insurance products in preventing the sale of life insurance primarily for investment purposes; and (2) policy justification for, and the practical implications of, the present treatment of earnings on the cash surrender value of life insurance and annuity contracts.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Because the pattern of policy usage as well as the type of products offered can change, Congress may wish to periodically reconsider its policy decision to grant preferential tax treatment to inside buildup, weighing the social benefits against the revenue foregone. |
Closed – Not Implemented
|
Congress, at least for the time being, has decided not to tax life insurance inside buildup. |
| If Congress decides not to tax inside buildup, it should eliminate tax-free borrowing of life insurance proceeds. Any borrowing of those proceeds should be considered a distribution of interest income. To offset the advantages of accruing interest income without tax, a penalty provision needs to be added to the regular tax. Since repayment of the amount borrowed restores the death benefits, any amount that is taxed when it is borrowed should be tax deductible if subsequently repaid. |
Closed – Not Implemented
|
Congress, at least for the time being, has decided not to tax life insurance inside buildup. |
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Income taxesInsurance regulationInterest ratesInvestmentsLife insurancePensionsTax administrationTax exempt statusTax lawTax shelters